Five Things We Learned At Inside ETFs

by on February 10, 2012 | ETFs Mentioned:

It’s always exciting to see renowned experts from all corners of the financial industry come together in one venue. Inside ETFs, the world’s largest ETF conference, fits the profile of such a noteworthy event. The 5th annual Inside ETFs Conference, hosted by IndexUniverse, took place in Hollywood, Florida just a few weeks ago in late January. This year’s event drew well over 1,200 attendees, including: ETF issuers (both big and small), index providers, industry analysts, as well as investment advisors of all walks [see also 25 Things Every Financial Advisor Should Know About ETFs].

Highlights from the event include expert-guided workshops, live trading demonstrations, as well as a handful of intriguing panels, and most importantly tons of discussion and optimism surrounding the ever-expanding ETF universe. Amidst the cornucopia of exciting product proposals and economic debates, I was able to pick out some valuable observations that are likely overlooked by many mainstream investors. Below are five insights I found particularly noteworthy from the latest Inside ETFs conference:

1. Explaining Gold Miner ETF Struggles

Investors will often times find themselves scratching their head in disbelief as gold prices surge higher while their mining stocks drift sideways. There is a rather simple explanation for this infamous phenomenon; most gold miners hedge their gold exposure, so that they can lock-in prices for their products far in advance to avoid volatility in their operating cash flows. When gold prices jump, it certainly doesn’t hurt mining companies, although the increase in spot prices isn’t as beneficial as most would expect [see Doomsday Special: 7 Hard Assets You Can Hold In Your Hand].

2. Intra-sector Correlations May Diminish Diversification Benefits.

Spreading out your exposure across multiple sectors of the economy is a sure way to diversify your portfolio. However, many investors overlook the notion that some sectors are often times dominated by a particular industry which potentially bears a relatively high correlation to another holding in their portfolio. In other words, when you add technology exposure to your portfolio, its important to realize that personal computer companies may potentially bear an unfavorably high correlation to your biotechnology stocks. One way around this is to utilize industry specific ETFs; for example, instead of opting for broad tech exposure through XLK, investors can select more targeted products to suit their needs, such as a semiconductor ETF (SMH) or perhaps a software-focused product (IGV).

3. Emerging Markets Still Boiling With Opportunities.

Although the investment case behind emerging markets isn’t nearly as compelling as it was 10 years ago, or even five years ago, the upside potential is still incredibly lucrative and appealing for a variety of reasons. Simply put, rising populations and increasing levels of urbanization across Asia and Latin America are generating tremendous demand for natural resources and consumer goods of all sorts. The ever-expanding middle class across developing nations is buying more food, cars, houses, electronics, and jewelry, which is effectively translating into robust growth for local companies as well as multinational exporting-giants. The increasing adoption rate of technology is further bolstering the speed at which these emerging nations are evolving at.

4. Market Cap Weighting Might Not Be As Terrible As We’ve Been Led To Believe.

With more and more alternative-weighted products hitting the market, it may appear at first glance that investors have been eager to move away from traditional cap-weighted funds. However, this observations is not entirely true, seeing as how cap-weighted ETFs maintain tremendous appeal among many passive, buy-and-hold investors, and for good reasons too [see The Truth About Alternative Weighting Methodologies]. The argument against alternative strategies is simple; these creative approaches simply tilt exposure towards various “factors”, such as value or growth, whereas market cap-weighted products consider the entire universe of available information that investors base their decisions on.

5. Global Bond Diversification Is Key In This Low Rate Environment.

We are witnessing an unprecedented economic landscape riddled with all-time low interest rates. While attending Inside ETFs, we could’t help but notice all of the excitement building around international fixed income products. The evolution of the ETF industry has brought forth a toolbox of bond instruments capable of serving as valuable diversifying agents and essentially allowing for mainstream investors to tap into previously difficult-to-reach corners of the global fixed income market [see Bond ETFs For Every Objective]. Investors ought to consider diversifying their fixed income component with any number of the available products–whether it means opting for an emerging markets bond ETF to beef up their current return, or picking out a developed nation Treasury fund to help smooth out volatility over the long-haul.

Disclosure: No positions at time of writing.